On Monday, B.Riley maintained a Buy rating on Applied Materials (NASDAQ:AMAT) and increased the price target to $220 from the previous $175. The firm's outlook for the company is positive, citing manageable consensus estimates and the potential for modest sales outperformance.
"We believe consensus $6.483B (-3.8%)/$1.90 is makeable with modest upside potential to sales ~$13M above the midpoint on good fulfillment execution, while at-guidance EPS has modest COGS and/or opex mgt upside," said B.Riley in a note.
The firm's analysis suggests that Applied Materials' early quarter segment views are reasonably set, with expected sales in the Semiconductor Systems Group (SSG) ranging from mid-single-digit to high-single-digit growth to $4.50 billion. This is despite some ongoing weakness in China's DRAM and ICAPS sectors. Meanwhile, the Applied Global Services (AGS) segment may see a slight decline of 2% to $1.43 billion, with a cautious outlook for leading-edge Foundry, Logic, and Memory.
Gross margin (GM) is anticipated to decrease by approximately 30 basis points to 47.0% due to volume, with long-term targets of 48.5% considered achievable. Operating cash flow (OCF) and free cash flow (FCF) are projected to be $1.5 billion and $1.0 billion, respectively, with a portion expected to be allocated to a $6.0 billion share buyback program.
The consensus estimate for the company's performance is a revenue of $6.336 billion, a 2.3% decrease, and earnings per share (EPS) of $1.80. This outlook factors in modest headwinds from China's DRAM sector but also potential tailwinds from high-bandwidth memory (HBM)-related DRAM and Advanced Packaging (NYSE:PKG), as well as stable ICAPS.
Comparatively, industry peers have provided varied guidance, with Lam Research Corporation (NASDAQ:LRCX) indicating flat quarter-over-quarter performance and Tokyo Electron (TEL) projecting an increase in the low single digits. However, KLA Corporation (KLAC) reported a mid-single-digit slip due to a delay in fab start-up shipments. B.Riley expects Applied Materials' GM to improve by 40 basis points to 47.4% due to favorable product mix, while operating expenses are managed tightly to achieve a 28.6% operating margin.
In terms of industry forecasts for the full year, while Lam Research recently estimated a $88 billion market, Tokyo Electron set a higher expectation of $100 billion on February 8. B.Riley anticipates a market size closer to $95 billion, reflecting a balanced view between the two estimates.
InvestingPro Insights
Applied Materials (NASDAQ:AMAT), a leading player in the semiconductor equipment industry, has been receiving positive attention from analysts, with B.Riley maintaining a Buy rating and raising the price target. The bullish stance is also echoed in some of the InvestingPro metrics. The company's market capitalization stands at a robust $154.8 billion, reflecting its significant presence in the market. Despite potential headwinds in certain sectors, AMAT has demonstrated resilience with a price-to-earnings (P/E) ratio of 22.68, which, while on the higher side, indicates market confidence in its profitability, especially considering its consistent dividend payments over the last 20 years—an InvestingPro Tip worth noting.
Moreover, with a gross profit margin of 46.7% for the last twelve months as of Q4 2023, Applied Materials showcases a strong ability to maintain profitability despite varying market conditions. This aligns with B.Riley's expectations of a gross margin (GM) of 47.0%. Another InvestingPro Tip highlights the company's significant return over the last week, with a 1-week price total return of 8.62%. This short-term performance could be indicative of the market's reaction to favorable analyst ratings and the firm's strategic outlook.
Investors considering Applied Materials can find additional insights and tips on InvestingPro, including 19 more InvestingPro Tips for a deeper understanding of the company's market position and financial health. For those interested in an in-depth analysis, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/AMAT.
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